Reading The Tea Leaves: Japan's Rally `Is The Real Thing'
In his decade as a fund manager in Japan, Ian C. Burden has lived through a boom and bust at the Tokyo Stock Exchange. Now that the market's recovering, Burden, representative director with HSBC Asset Management Japan, is firmly in the camp of the bulls. He expects the yen to remain stable and the Japanese economy to keep improving--both positives for equities. Burden, 44, shared his views in a recent chat with Tokyo Bureau Chief Brian Bremner.
Q: Two rallies in the Nikkei have fizzled since 1993. Is this one different?
A: This is the real thing. From the middle of last year, we have had more aggressive monetary loosening and exchange-rate stability. The devaluation of the yen has allowed [$500 billion] in fiscal packages to work. There is now a cyclical recovery at a time when asset and land prices may have bottomed out. This is starting to look like a self-sustaining economic recovery.
Q: Some $60 billion in foreign money fueled this rally. Are Japanese investors now joining in?
A: The foreign money is probably tapering off. These investors are holding. Now, we're seeing the shift of [domestic] pension money into the market. And on a rather patchy basis, we are seeing individual investors come back.
Q: Where are you putting your money?
A: We are fairly committed to cyclicals like steel and shipbuilding. We have cut back on technology, bearing in mind the troubles in the U.S. and questions on the supply and demand of computer chips. Still, we like Sony Corp. because of the weaker yen and new products like the digital video disk.
Q: Are you buying bank stocks?
A: We are looking more at the banks. They are taking big write-offs and have been undervalued.
Q: When will Japan's record-low interest rates finally turn higher?
A: If we see surprisingly good economic data later this year, the Bank of Japan may wish to tighten. There are hard-liners in the BOJ who want to make a statement. But any tightening would be premature.
Q: What might trip up this rally?
A: We need a yen-dollar exchange rate that behaves itself. And there is an issue of what Japan's deteriorating fiscal position will mean. This will have to be addressed by a hike in the consumption tax. That could hurt the outlook.